An attempt to pursue the policy of tax increases is a way to lower economic growth and output in the future. On the other side, pro-growth tax policy and the ability of cantons to set individual and corporate tax rates, raises personal and corporate incomes as tax burden reduces and competitiveness increases. It is highly unlikely for a political party to strognly support the policy which clearly undermines Switzerland's long-term competitiveness in the global economy.

A newly-formed coalition of center-right political parties in Czech Republic is going in the right direction since it wants to introduce a 17-19 percent flat on both individual and corporate income. The pursuit of a single flat tax would also apply to the VAT but there are particular accomodation services and food to be applied to lower tax rate. Currently, there are four income tax levels, ranging from 12 to 32 percent, while businesses are now taxed at 24 percent corporate tax rate.

I warmly welcome efforts made by Czech policymakers as they want to pursue fighting against tax cartels. Further lowering of individual and corporate tax rates will stimulate the economy to grow faster as well as a number of jobs will soar if the flat tax comes into action. A single, low and applied flat tax will furtherly help to increase the level of the international competitiveness of the Czech Republic. Fair and transparent tax code is the best way to dynamize the labor market and productive behavior based upon the convergence of the productivity. Making business environment friendly, is a great step ahead of the global competition. The flat-tax will enhence those changes and set a solid grounding to further growth of capital formation. As a liberal economist, I write to express my support to the proposal of flat tax in Czech Republic.

Slovenia is a small country. But despite being small, its economic potentials are astonishing. Throughout the period of economic transition to free market economy, the government never imposed radical structural reforms that would boost the economic growth of this small country. Far away from liberal economic policy, the government rather chose the gradual model of economic change which is now paying its price. In the beginning of transition, Slovenia emerged as the richest former communist country. Being the richest one in the group of ex-communist countries, did not give economic policymakers very much needed engine to become richer and to become the leading innovator in Eastern Europe. After the country won the independence struggle, a bulk of serious problems remained in action. Slovenia inherited hyperinflation from Yugoslavia. The policy of exchange rate depreciation embroiled a highly questionable monetary policy of the central bank. In fact, discretionairy exchange rate regime had become a tool in making decisions of how to guide the economic policy. As a result of this practice, the inflation bubbled rapidly as monetary emissions measured as the increase of monetary aggregates. According to the Index of Economic Freedom, the presence of economic freedom itself in Slovenia has constantly been the lowest among the economies in transition. However, new center-right government pledged to start rapid privatization, deregulation and liberalization. It promised to impose structural reforms in order to let the economy grow and international competitiveness rise. It set bright promises but those shining commitments turned into dismal performance. According to IMD, Slovenia has advanced from 52th up to 45th place on the scale of competitiveness but the most striking information is that in the field of government policy, Slovenia stuck at the same rank. World Economic Forum published Global Competitiveness Report on an annual basis. According to the referrence, Slovenia's level of competitiveness declined. 33rd place is not a flattering position.

Now let's take a closer look where Slovenia actually wasted "golden opportunities"

Labor market reform has been Slovenia's worst tragedy ever since. Post-communist trade unions enjoy a vast political support. Throught the convergence period, they were the main drivers of economic policy. They vastly oppose labor market liberalization in order to make it more flexible. Empirical studies show that liberal labor code and flexible labor market enhence economic growth while also the level of productivity goes up. Productivity itself requires openness. In Slovenia, labor costs per capita are growing enormously. Tax burden measured as a percentage of the GDP, is getting close to 40 percent. Progressive (communist) tax rates on individual incomes are still high though government changed the progressivity of tax rates only for a little bit. Since labor costs are high, employers hardly employ highly-skilled and productive individuals. Coupled with competitive businesses, they are the main component of technologically-innovative economy. In Slovenia, labor market was never radically reformed. Data show that the inudstrial restructuring of the state-owned companies in the beginning of the 90s, took the slowest pace eventually possible. Pension reform was catastrophic. The indexation of pensions with the growth of wages will leave terrible impact on the stability public finance. It is expected to see public debt growing and budget deficit continuing to slope down. The privatization of the state economy accelerated but it took its blown with a minimum degree of transparency through which the government consolidated its position in the economy. The privatization of the largest state-owned companies seems like a never-ending story. Public companies are being sold to politically priviliged. Government's role in the economy extends through a wide range of area, from services to media. Putting all this together, the international competitiveness of the public companies is low as well as value-added is low. In order to get on track, the companies need to be sold to the best possible buyer regardless of his nationality. A strong infusion of foreign direct investment could help to raise the level of the productivity of the firms as well as it would create numerous opportunities for unemployed. In 2006, Slovenian students valantly opposed education reforms. They opposed more private education institutions and they also heavily resisted on cutting some politically given benefits through which bureaucrats from student organization (SOS) exercised the role of rent-seeking actors at the expense of taxpayers. There is none Slovenian university among top 500 in the world. Perhaps the most tragically obscured political shame in this year has been the lack of the liberalization in the financial sector. Banking sector, particulary the unavailibility of the investment capital to venture entrepreneurs, is one the main degressors of economic growth and competitive entrepreneurial development. State-owned banking and insurance control approximately 50 percent of the banking sector assets. KBC, Beligian insurance and banking company, was a saving partner for the Nova Ljubljanska Banka, but political pressures once again showed aggression and hostility towards foreign investors. Only one-third of Slovenia's banking assets are private and that the state effectively directs the three largest banks. Moreover, the government effectively controls 50 percent of total banking assets. On the other side, the protection of private property rights in Slovenia has been constantly low, judiciary has emerged as a strongly influential political group which exercies its role through rent-seeking. It has also vastly opposed setting wages in accordance with efficiency, productivity and with the number of cases effectively resolved. The difficulty of commerical contract enforcement is heavy. The difficulty involves 25 procedures, 1350 days and 15,2 percent of the total debt following the evolution of payment dispute. Capital market is marred by insider trading with information. The Slovenian court system is marred by inadequate staffing and slow procedural progress and is in need of further reform. Slovenia wasted a bulk of opportunities in 2006. Perhaps the greatest opportunity ever offered was the flat-tax proposal. It couldn't be found more progressive step forward than the simplification of the tax system. Flat-tax would give companies a stimultaneous track to increase profits and capital gains in order to reform companies' structure throughout the convergence towards technologically-advanced economy based upon innovation, value-added and the growth of total factor productivity.

Year 2006 has also been marred by political shame in Slovenia. The crime rate exercised through illegal methods on capital markets did not reduce. The legislation , the aim of which is to prevent capital crimes to happen, is still very inexplicit. The judiciary doesn't exercise its role of punishing illegal capital transactions and payment. It also heavily protects companies whcih collapsed primarily due to dusty management. It is sad to see how such politically influential "transition businessmen" are heavily protected from very much deserved sanctions. There is no politician in Slovenia who would be willing to investigate such crimes.

From the perspective of an economist, all Slovenian politicians as well as political parties behave like socialists. In fact, politicians cannot be as much trusted as they are in Finland, example. In Slovenia, every politician has exercised its role through the participation in sections of communist political party, i.e. the party whose origin is totalitarian. I regret the fact that Slovenia did not expell communist members from public institutions. Everyone would benefit from this.

I wish a Happy New Year to the visitors of my blog and I wish them successful efforts in 2007 and also lots of happiness and personal satisfaction.

In the future, we will furtherly be giving the best of our ability to pursue dynamic posts with upbeating topics, challenging views and highly important issues regarding free market, economic policy, business, management, economic freedom and prosperity, and, above all - individual liberty.

“The survey shows the continued commitment of the Irish Government to keep the tax and social welfare costs down and hence keep the costs of employment down. However, Ireland continues to be exposed to pressures from eastern Europe where employment costs are still relatively low. As those economies gather pace and start to compete more effectively for international mobile investment, Ireland will be at a considerable disadvantage. While it is unrealistic to expect Ireland to be able to close the gap in remuneration levels, the challenge for Ireland Inc is to effectively promote the added value that Ireland has to offer through its location, other taxation measures and experienced workforce so that it continues to attract sustainable investment to ensure its economic growth.”- Pat Cullen, Deloitte Tax Partner

Ireland was ranked 15th out of 24 countries taken under consideration. The average level of the remuneration costs was EUR 36,852. Compared to 2005, the whole cost level increased by 5,3 percent. There is also another very positive aspect in Ireland's case. On average, the total cost of employment did not increase while total tax burden on employee has shrinked by EUR 530. In comparing relative changes in the position of the countries, Ireland still has the lowest cost tax and insurance costs measured as a proportion of the total remuneration paid. Ireland thus continues to have the lowest level at 6,34 percent, Cyprus is in second place with total cost proportion at 8,77 percent. This clearly confirms that Ireland has one a favorable tax climate for employees.

Sunday, December 24, 2006

Below you can find a test in which there are 10 different questions and two different answers referring to each question. There is also a number of points beside possible answers. And there is also the analysis below. There are three different categories giving a description wheater you are a classical liberal (libertarian) or not. Calculate the amount of points achieved and see where you stand?

P.S.: Questions are divided into two parts. The first part examines questions connected with the level of tolerance of economic freedom while the second part of the group of questions examines the level of tolerance of personal, civil and political liberties. And don't be afraid of the title, even if you're not an economist, it is highly desirable to take this.

Question No.1;Consider an economy in transition where 35 percent of the economy is still in the hands of the government. The election period arrived and the libertarian party surprisingly won the elections. Among the very first reform proposals is the privatization of the financial sector, including the insurance and banking sector. The Minister of Finance suggests that foreign strategic partners are according to the observations and recent studies the most suitable option for the recovery of the financial sector of the economy. But there is also a strong presence of interest groups and falsified intellectuals with strong media influence who fanatically oppose the privatization. The Minister of Finance and the Prime Minister continue the process of privatization despite enormous pressures from various interest groups. Have they gone into the right direction?

(a) YES [2 points] (b) NO [0 points]

Question No.2;In the next step, the government intends to reform the labor market in the way of greater flexibility in order to cut the tax burden which hampers the economy. The newest reform proposal by the government includes easier, faster and cheaper hiring and firing of workers. The most striking ingredient of the reform is the abolishment of collective bargaining between the federation of employers and labor unions so that labor market is given a full degree of liberty. There is also no more legislative protection of trade unions and employer federation. And there is also a reform proposal which is going in the line of labor market's internationalization. Of course, trade unions strongly reject the reform proposal. They even promise to trigger strikes on the street. Shall a government ignore the pressures and reform the labor market?

(a) YES [2 points] (b) NO [0 points]

Question No.3;Consider an economy in which the competition in health care sector is heavily limited. The government continues imposing liberal economic reforms. In this case, the government plans to cut licensing proceedures and allow private competitors to challenge services offered by a public health-care. In the next step, the government will do the best of its ability to privatize health care colleges and make them more flexible through the elimination or enrollment restrictions. It will also privatize a majority of subsidized health care services through which individuals contribute premiums for health-care services through voluntary free exchange insurance contracts. And finally, the government plans to abolish monopolized pharmacy chamber which currently holds monopoly on drug supply and licensing procedures thereof. It intends to liberalize the drug market completely by letting private pharmacies enter the market. Of course, interest groups in health-care sector strongly oppose to this particular proposal. But the government doesn't allow them to tolerate their special interests isolated from the market. Is the government going in the right direction?

(a) YES [2 points] (b) NO [0 points]

Question No.4;There is a sudden price increase on the market. The price of the most frequently consumed automobile gas has increased significantly but it has been predicted that the price will soon settle back to the cooling of global gas markets, currently facing a supply shortage but a heavily increased demand particular on Chinese and Indian side. The government is suddenly afraid of the situation and intends to buy a majority of shares in the biggest oil supplier of the country in order to be able to impose price controls through robust and discretionary decision making. According to your opinion, is the government going in the right direction?

(a) YES [0 points] (b) NO [2 points]

Question No.5;Assume an economy in which the inflation rate is currently 6 percent and the monetary policy is highly discretionary. Exchange rate regime is not flexible but used as a tool on which the monetary policy of the central bank is based. There is no free floating exchange rate regime, the government is neither planning to change it in order to ensure long-term monetary stabilization; Comparatively high level of inflation rate is a strong threat to the monetary progress of this economy. An advisory board, i.e. the council of economic advisers, suggests shifting to free floating exchange rate regime. It also sends government an appeal to stop directly supporting export companies through discretionary exchange rate fluctuations as a means of indirect subsidy to companies. The advisory board also warns the government about the rapid rate of monetary aggregates without the consideration of "money supply rule". The growth of quantity of money in circulation exceeds the growth of the GDP for three times. The advisory board also sets a proposal of inflation targeting regime through which the policy of inflation targeting is publicly announced and set as an objective. Did the advisory board give government a flexible set of solutions in order to curb the inflation?

Question No.7;Prostitution should be made legal and there should be no restrictions on this kind of market activity.(a) Agree [2 points] (b) Disagree [0 points]

Question No.8;Abortion should not be a matter of free determination without the interference of the government. Hence, abortion should be punished and made illegal while women, if abort the child, should be sentenced.(a) Agree [0 points] (b) Disagree [2 points]

Question No.9;People from other countries, from all around the world, should be given an opportunity to come to Slovenia and live here if they want and thus we let a "melting pot" society to live. Hence, English should be made the first language together with Slovene to enjoy equal status. Slovenia should be promoted as a friendly land for foreigners from all around the globe.(a) Agree [2 points] (b) Disagree [0 points]

Question No.10;The government should simply legalize the homosexual relationship. We don't need a separate treatment of marriage. Hence, the homosexuals should be allowed to adopt children while they should not be treated separately from other citizens since living your own life and making your own decisions is inalienable and nobody has a right to intervene individual lives.(a) Agree [2 points] (b) Disagree [0 points]

Criteria:20 pointsCongratulations! You have confirmed yourself as a truly classical liberal economist and libertarian-minded individual.

19-16 pointsWell done! You mostly support liberal ("laissez faire") economic and social policy while you still have doubts on several issues involving personal or economic point of view.

16-0 pointsYou still have to work hard on letting libertarian economic and personal paradigm come to your mind. You're either too conservative or too leftist to be noted a libertarian. You seem to dislike "laissez-faire" economic policy or liberal attitudes towards individual liberty. However, sorry but you currently cannot be labelled a "classical liberal", i.e. libertarian.

Consensus is, to me, similar to abolishing nearly all beliefs. Consensus devastates the foundations of our values completely, it shrinks our principles and it eliminates our agenda to the fullest. Therefore, consensus is something what everyone agrees with, but it also an entity in which nobody believes.

William H. Overholt has written an excellent article on how individuals and companies gain gain benefits from the globalization. Generally speaking, the essence of the article is primarily focused on the point of periodic protectionism. Protectionism is indeed causing enormously threatening barriers to countries on a global level. Protectionists are struggling in a direction that would limit the free trade, therefore keeping jobs at home, and imports out of the country. Critiques of the globalization state that the process of globalization at an accelerated pace is promoting inequality at the expense of low-wage workers where corporate managers benefit while they are exploiting the labor force in cheap labor countries such as India, Indonesia and China.

Those who say so, should apologize to the people, for saying untruthful things which leave behind a huge psychological influence since such propaganda is boosted by the ideological manners. But thanks to our common sense, the ideas of the opponents of globalization have no fundamental source of empirical verification for defending their ideas which sound literally insane. Therefore, their defense of anti-capitalism, anti-globalization and anti-Americanism is ideologically-driven, hoping to restore the ideals. But, as Joseph Schumpeter, a distinguished Austrian-American economist of Harvard University once said, if you want to achieve the ideal by force, then you'll have to use lying. Arguments, rational discussion and economically empirical bulk show that their promotion of serfdom is inevitable.

(1) Business owners and entrepreneurs are those individuals who bring their knowledge to certain country. They also bring technology and capital equipment. But the most important thing is that they bring opportunities to thousands to improve their prosperity through the process of growth of knowledge, the improvement of skills as well as through the growth of productivity. Without entrepreneurs and business owners, those children and labor force would probably continue living in misery and poverty. Protectionists, anti-capitalists and anti-americanists suggest that companies who undertake such decisions in cheap labor countries should immediately be punished. What if they start lobbying and what if they succeed in implementing their ideas? If enacted, then Wal-Mart would be forced to leave India and other companies as well would be pushed towards the edge where they were required to remove the production facilities out of the particular country. Will those "critically inspired intellectuals" and the supporters of anti-capitalistic mentality take the share of the responsibility in their own hands? Will they travel to India and apologize to individuals who lost the job? Will they pay him an education, food and basic health-care from their wallet? Will they tour a village where individuals would be living in poverty after they lost the job and say to a young fellow: "Sorry buddy..." It is terrible to listen those ridiculous anti-capitalist intellectuals, groups and other individuals how they feel compassionate with poor people and how their ideas are humane. Frankly, it’s quite the opposite. Their ideas are inhumane and their ideas for example, drove young workers of Bangladesh in the wheel of highly uncertain future in a very negative manner. Since Wal-Mart was forced to remove from Bangladesh, a bulk of individuals, particularly young women, were made prostitutes in order to earn a living. In the period of globalization, millions of individuals were lifted out of poverty; the income level of individuals in those countries grew strongly. For workers, the globalization has meant the opposite of the inequality. The truth about globalization is the opposite of what protectionists speak. It brought opportunities to millions of individuals. It brought them brighter, fuller and richer tomorrow as well as a growing prosperity.

(2) In Slovenia as well as in other European countries and also in the United States, we often hear how workers from low and zero value-added fields of the economy are suffering from globalization. Negative effects of globalization cannot be exaggerated by attributing job losses to competition from India, Indonesia, China and Philippines. We often hear how certain countries are exporting jobs overseas. This is very far from being true. Scholarly economic studies have shown that the reason for cutting jobs mostly in the manufacturing sector is a domestic productivity. Changes in the rate of productivity have transformed the production lines. Technological readiness coupled with know-how resulted in less obvious needs for basic production workers. Instead, the manufacturing sector needs educated individuals, mostly highly profiled graduates whose knowledge and skills stream towards the convergence of productivity. The outcome that follows is the increased level of product competition in a global market arena where the behavior of market actors chooses the best possible option. In order to choose, there is a price competition in the market meanwhile the rapid transformation of production lines firmly streams forward to competitive product prices on the market. Sometimes it took two days to produce a car while today it takes less than a day to build-up the whole car.

(3) Another, more oftenly stressed argument of the protectionists is that job flight to destinations overseas is dishonest and unfair. But they forget to stress the information that both, the U.S. and China, have lost domestic manufacturing jobs because of the increased productivity and that China has lost ten times more manufacturing jobs than the U.S. There are usually two ways to increase people's standard of living. One way is increasing wages and the second one is through cutting prices so that you're able to buy more goods and services at the same amount of money. Protectionists claim that the government should immediately increase prices of goods produced abroad through the imposition of import quotas and tariffs. But isn't the ability to buy inexpensive quality shoes from China and cars imported from Japan, the soundest way to increase the standard of living? Low prices of goods and services explicitly benefit low income workers in Slovenia, Spain, Austria, U.S., or anywhere else. Let's take two different individuals into account. One is high-income earner and the second one is a low-income earner. If the first one buys Cesare Paciotti shoes for $400, he doesn't benefit very much. But if the second person buys shoes for $28 at Wal-Mart, then he benefits greatly. Empirical studies and observations have shown that lower prices due to various product imports from China, increase real incomes of lower income Americans by 5 to 10 percent.

Low prices and trade liberalization with other nations is the surest way towards more prosperity. No welfare programs have ever accomplished not even a fraction as much gains and benefits as free trade and dynamic competition brought up. No politicians, no bureaucrats, no anti-capitalists, no critical intellectuals, no Marxist worshippers, no anti-americanists and no socialists have ever achieved as much as free trade did it in a matter of moments.

(4) Protectionists instantly forget to mention the rate of fresh job creation due to globalization's rapid success. Easier access to foreign direct investment enables many companies from particular countries to expand their sales activities in China, India, Indonesia and Bangladesh and penetrate therein. The ability of Slovenian and Austrian companies to flow their operations in Chinese and Indian market and to compete abroad, immediately creates many high level jobs in the operation sector back in both countries, Slovenia and Austria, with a great measure of dynamics and diversity.

(5) One of the most obvious features of globalization is that open economies adjust to real competitive advantages faster. Unemployment rate in the U.S. has recently peaked at 4,4 percent while the unemployment rate in France along with other highly protected economies jumps much higher because labor dynamics is low as well as because tax burden of the economy is enormous. In such strange and politically arranged conditions, many people are made doing an inappropriate job. To a larger extent, in the most protected economies mostly in Africa and Latin America, the unemployment rate goes double-digitally up to 30 or even more percent. Globalization and the promotion of open trade and migration has lower the unemployment significantly. The globalization itself lifted 3 billion people from non-human condition of life into modern standards of living. Even more, the globalization has brought decent food, modern clothing, life utilities and basic shelters to millions of families.

Mr. William Overholt noted that in the early 1950's the life expectancy rate in China was 41 years while in 2005 the average life expectancy was 72,7 years. This is a huge reduction of inequality that truly has to be admired.

(6) Rapid economic growth in East Asian economies is bringing the greatest inequality reduction in this part of the world ever to be noted. As the result of rapid technological progress and open market economy, upper- as well as lower- middle income countries are growing much faster than advanced economies. In comparison with France or Italy, the average economic growth spread across China, China, Indonesia and Vietnam outscores the average growth rates of European sleepwalkers for more than three times faster.

(7) We often hear complaints from the workers about the pain of change. It is true that the unemployment can wipe out their savings and turn their life into nightmare. Their suffering can't be ignored. But if the policies of protectionists were in charge, the agony of the unemployment would continue to grow and become more difficult and uncomfortable until the point where the worst of the worst would come out. At that time, the effect of the agony would triple itself.

(8) Neither Slovenia, neither any other country will advance if the inequality would be significantly lower at the expense of economic growth, rapid restructuring of firms and if status quo on the labor market remained in action. The use of coercion to achieve equality through welfare will result in higher unemployment rates and lower growth rates while measures introducing free trade, education for those who suffer from globalization, rapid tax cuts, entrepreneurship and market competition, will decrease unemployment and increase economic growth and above all, increase opportunities and this is the surest way to avoid long-term economic stagnation and relative downturn in the future.

Slovenia and other countries will benefit only from competitive free markets. Competition is the agenda with magical power. No welfare programs have ever accomplished not even a fraction as much gains and benefits as free trade and dynamic competition brought up. Slovenian policymakers should rather focus on how to give individuals an opportunity, not a “social subsidy”, to get a decent education so that they will benefit from globalization rather than suffer from the status quo which has been achieved through unions' use of power. The protectionism is indeed an economic poison as Dan Mitchell perfectly points out. In the context of progress and improvement of the standards of living, faster economic growth, entrepreneurship and education opportunities help low income individuals much more than charity and social welfare programs. In fact, charity sounds emotionally appalling and sometimes helps to improve the situation in various forms at various places but in the long-term perspective, charity doesn't solve the problem. Foreign aid programs are a direct gateway to even more corruption while countries and nations depending on foreign aid haven't improved the economic conditions while faster growth has been rare as well as productivity improved only by a little. Other features aiming to support the establishment of entrepreneurship lagged behind the very much needed pace. To come to an end, education opportunities, competitive entrepreneurship and free open trade are a key to unlock the economic miracle among individuals. There is no greater assistance to the poor than simple and transparent flat tax system. Protectionists, critical intellectuals, anti-americanists, anti-capitalists, Marxist worshippers of serfdom and new socialists, harshly oppose to various forms of liberalization not because they necessarily disagreed on them, but because those measure, if enacted, would banish their ideas and so they would become unimportant and the most important thing is that they would not have people to manipulate with anymore.

Thursday, December 21, 2006

The latest Economist's comment perfectly reveals the traps being hidden behind the myth of the Scandinavian models. However, it becomes unclear when various politicians around the globe tackle their rethorics and agendas under the attachment of a "single" Scandinavian model. We have written ostensibly on the point of problems which particular Nordic countries are now facing. The latest statistics shows that Sweden's GDP per person measured as a percentage of the OECD average is rapidly falling beyond historically achieved levels. Prior to 1950, Swedish GDP per person equaled 120 percent of the OECD level while in 1993 the level of the GDP per head was only 90 percent of the OECD level. It may take years for Sweden to recover from this particular loophole. Another striking information is that not even a single job in the private sector has been created since 1950. Statistical data and also observations written by Steffan Karlsson, Johnny Munkhammar and Johan Norberg confirm that. The so called "Swedish social model" may soon colapse because of the ageing population. Exactly 33 percent of the GDP is contributed to social welfare programs in Sweden and this number is significantly above the European average, not to mention the average of other countries around the globe. Technological sector and research and development activities are strongly supported as the whell of economic growth turns forward. In contrast to Continental countries, policy-makers in Sweden, Denmark, Finland, Norway and Iceland are running a disciplined public financial policy of budget surpluses. And since budget pressures are minimized or perhaps even eliminated, the outlays for social welfare benefits become much more sustainable than in the Continental European economies. Swedish economy grew at an annual rate of 5,6 percent in 2006. This was enough for the central bank to trigger interest rates in order to cool the economy and to increase the price of borrowing. Bigger Swedish companies have been breaking export records. In truth, golden age of Swedish economy has gone. Between 1870 and 1950, average growth in Swedish GDP and productivity was by some measures the strongest in the world. For most of the last 50 years, this miracle changed into the relative decline including a deep recession in the 1990s. There is also a heavily regulated labor market. While government employment has grown largely, private sector employment declined throughout the last 50 years. Despite the vast size of the government, the efficiency of public-sector input is less than 0,6 (1,0 = max) which means that the input of Swedish public sector is 40 percent lower than the input of the public sector in the United States.

An interesting definition of the Scandinavian model was given by one of the fewest Swedish reformers, namely Carl Bildt. According to Mr. Bildt, the recipe for the perfect Nordic model includes the following ingredients; Finland's education system, Danish labor market, Estonian tax system, Iceland's entrepreneurship, Sweden's management of big companies and Norwegian oil. These are honorably admired Nordic features while a bulk of social-welfare measures should be immediately forgotten no matter which country or a group of countries wants to look northward to pursue the Nordic economic and social policy. I recommend them not to copy the Nordic "welfare" experiment on a permanent basis. It will cost them too much.

Sunday, December 17, 2006

A recent study by the IMF argued that, if France implemented the structural reforms it has promised, this would raise its national income by around 10% (compared with doing nothing). But if everybody in the euro area did the same, French incomes would rise by 14%.

Tuesday, December 12, 2006

"I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, how do you hold down government spending? Government spending now amounts close to 40% of national income not counting indirect spending through regulation and the like. If you include that, you get up to roughly half. The real danger we face is that number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes. "- Milton Friedman

Roughly a decade ago, Slovakia could be described in the following words. According to a vast majority of economic indicators, Slovakia was on the edge of existence and macroeconomic stability among the nations in transit. It was governed by Vladimir Meciar, an iron-fist nationalist dictator, and by the post-communist coalition. This coalition isolated Slovakia from the international community politically as well as economically. This enormously devastating stituation came to conclusion when Madleine Albright regarded Slovakia as the black hole in the heart of Europe. After the independence, Slovakian GDP cumulatively fell by 24,7 percent (Fisher, Saray 2000) taking into account the level of Slovakian GDP before the shift to transition began (1989 = 100). The program of macroeconomic and monetary stabilization lacked behind the very much needed pace. Until 1998, the inflow of foreign direct investment was the lowest among transition countries (Damijan, Polanec 2003). As a matter of fact, the household rate of internet connections was constantly below 15 percent (Eurostat, 2001) which the lowest internet connection rate among households in the entire European Union.

At this state of misery, a new Slovakian Prime Minister Mikulas Dzurinda began his mandate with a bulk of economic reforms which included the education reform, health sector reform, tax reform, social security reform, labor market reform as well as the entire reconstruction of public administration. A youthful team of reformers included experts who graduated from Harvard, Princeton and Stanford. Martin Bruncko, one of the foremost reformers, received an honorable reward from HarvardUniversity for his thesis on the implications of the flat tax. As a result of fast, seriously and transparently imposed economic reforms, the Slovakian economy skyrocketed. In 2003, economic growth rate peaked at 4,2 percent, in 2004 it equaled 4,9 percent and in 2005 it reached its peak at an incredible 5,6 percent. In that year, Slovakian economy was the third fastest growing tiger in Europe (OECD, Economic Outlook, 2005). In 2006 OECD estimated the annual economic growth rate of Slovakia at 6,2 percent. In 2004, Slovakia adopted a single flat tax on both personal and corporate income. This easy, simple and pro-growth system replaced the previous one which included five different tax rates, ranging up to 38 percent. After the first package of tax reforms was introduced in 2003, tax burden rapidly decreased to 13,7 percent so that economic analysits from OECD noted Slovakia as "tax heaven of Europe". Giving the economy very much needed boost, the unemployment declined sharply. It went from 20 percent in 2001 to 15 percent in 2004 and 11 percent in 2005. As a result of radical and unabating structural reforms, the quality of business environment improved dramatically. Foreign direct investment (FDI), one of the most powerful engines of economic growth, grew robustly. Automobile industry found a bulk of incentives in Slovakia. Equipped with low labor costs, shining geographical location and incredible opportunities offered stimultaneously, Slovakia became a host for automobile enterprises such as Volkswagen, Pegueot, Citroen and KIA Motors. The latter will start pushing its production in a small town of Zilina in the North of Slovakia. On the other, a stimultaneous tax system and a flexible labor market did very much to attract foreign direct investment from the automobile sector. Increased volumes of capital inflows are a result of stimulating business climate which banished restrictions on ownership participation so that only minimal restraints remain in action.

"The country's low-cost yet skilled labor force, low taxes, liberal labor code and favorable geographic location have helped it become one of Europe's favorite investment markets."- US Department of Commerce

According to numerous reports, Slovakia is the leading innovator in making investment climate furtherly favorable. Minimal barriers to capital transaction also present an important feature by which Slovakian policymakers let the system of business and capital transactions running freely, without burdensome restrictions and bureaucratic regulation.

A group of youthful and enthusiastic economists under the leadership of Ivan Miklos was aware of the importance of the privatization of banking and financial sector. Previously restricted financial system under the possession of the government did not offer credible enhancement mechanisms to entrepreneurs and individuals. A quick, transparent and relatively fast privatization of almost entire financial sector included the undergoing series of structural changes, financially weak banks were eliminated and three largest state-owned banks were immediately privatized. Today, the financial sector consists of 18 commercial banks and three largest banks are 100 percent under the ownership of foreign investors. Interest rates were liberalized without the preliminary enforcment of Maastricht conditions (within ER mechanism) needed for a country if it wants to enter the European Monetary Union as well as credit condtions were reset and credit limits eliminated. Slovakian financial sector is small but far most efficient than most of Slovakia's counterparts. Financial system offers incredible opportunities to foreign and domestic investors, there're numerous investment incentives which stimulate investors to rely on pro-market behavior. On the other side, financial sector in Slovakia had been reformed to change its behavior in order to transform it into pro-growth pillar of stimulations to businesses and individuals. The dynamics of the financial sector also applies to the business investment climate which is known after its transparency, tax and entrepreneurially-friendly attitudes (Heritage, 2006) and non-discriminatory treatment of investors regardless of their national origin. World Bank (2006) named Slovakia the top reformer in improving the climate of its investment environment. As to another importatn characteristic of the banking sector, credit limits are among the least restrictive in Europe (IMF, 2005).

In 2003, Slovakian government undertook serious steps in reforming a very rigid labor market. Renovated Comprehensive Labor Code was legislated. It allowed greater flexibility at hiring and firing workers. The flexibility of labor market essentially contributed to the Slovakian shift to freer economy (CATO, 2003). The labor market is among the least regulated in Europe. In 2004 the costs of labor per unit of GDP equaled 0,2 percent.

Slovakia also has incredibly transparent, pro-choice and activity-based pension system. Many analysts from Ernst&Young and Dun&Bradstreet are putting Slovakian transparent and long-term sustainable pension system as an example to Western governments in France, Germany and Italy. New system enables more free choice. The individuals can therefore choose between the old 'pay-as-you-go' system and new system which is based upon individual contributions to personal (private) retirement accounts. Individuals can also put their away in various investment and private funds in order to keep their money safe from political expropriation. Current social security contribution rate is equal to 29 percent of the gross salary. 9 percent of this amount goes to the old system while 9 percent goes to the new system. This particular ratio also covers other types of insurances. More than 50 percent of all contributions is invested in various private investment funds which yields a lot more than the old system and also offers incredible opportunities to control long-term and short-term risk. Thus 8,5 billion SKK is saved in 8 various investment funds. Their job is the management of pension savings. There are numerous opportunities let to individuals. Every investment fund consists of 3 additional funds - growth fund, balance fund and conservative fund. 80 percent of all portfolio growth funds can be constructed in exactly the same way as asset management funds. Younger individuals can choose between all 3 funds while older generations can vary between balance fund and conservative fund. Businesses whose mission is the management of pension savings can accomplish their investment anywhere abroad but 30 percent of all investments is required to be based in Slovakia. Pension reform was enforced quickly, within the period of one year. Personal retirment accounts (PRA), where individuals and businesses can put their savings, have two increasingly important characteristics - (i) they don't violate the principle of private property and (ii) they are safe from political abuse (Tupy, 2006).

Slovakia passed a long period of economic changed. From financially devastated economy, it stepped at the top of economic miracles under the leadership of Mikulas Dzurinda and Ivan Miklos. A group of serious economists and reformers, including Ivan Miklos and Martin Bruncko, made Slovakia the first serious reformist country in Eastern Europe after Estonia. In 2006, the World Bank ranked Slovakia among top 20 countries with the most business-friendly investment environment and entrepreneurial climate. There had been a particular emphasis on undertaking economic reforms in order to stimulate productive behavior which was generated by pro-growth tax legislation embodied in the imposition of the flat tax of 19 percent on both personal and corporate income. This particular type of tax system is far away from being complicated. It is far more efficient, transparent and pro-growth. The flat tax replaced the old system which was known after its enormously grown progressivity, ranging from 16 to 35 percent. According to analytical studies, tax reform stimulated the growth of the economy. It also improved the investment climate and removed heavy burden which had been caused through highly progressive system of income taxation. Tax reform resulted in both, greater freedom and greater equality. According to some econometric estimate, structural reform of the tax system empowered the economy which resulted in 2,5 percent increase of the economic growth on the annual basis. In the past period, Slovakia had significantly improved the state of macroeconomic stability. In fact, Slovakia was the foremost macroeconomic reformer in the region (see: Macroeconomic Environment Index). In 2004, the country scaled up and came among 50 most transparent, firm and efficient macroeconomic environments (WEF Global Competitiveness Report 2004, McKinsey&Company 2004).

The privatization of government enterprises and state assets was fast, non-troubled and transparent. In 2001, Austrian Erste Bank and Italian Banca Intesa acquisted the package of governmental stakes in the following banks; Slovensky Sportelna and VUB Banka. In 2002, the government sold the stakes of gas distrubtion company Slovensky Plynarenski Priemysel to EDF, RWE and Ruhrgas. The infrastructural change was accompanied together with rapid economic transformation (IMD, 2006).

The main features of labor market reform had been the shift towards greater flexibility of labor market itself. This particular objective was reached through (a) more flexible labor contracts, (b) stimulating working extra-hours and (c) less complicated hiring and firing of workers. According to data from TREND, approximately 80 000 graduates left Slovakia between 1994 and 2002 which equals nearly 7000 to 10 000 graduates a year. The so-called "brain-drain" effects reflect in 0,6 percent decrease in annual economic growth (McKinsey&Company, 2005).

Ivan Miklos and the group of economic reforms were the first serious signs of economic change in Central Europe. Ther willingness to impose a bulk of structural reforms did not decrease even though trade unions and other signals of neosocialism furiously opposed economic reforms and refused the need to let the economy grow and make economic change happen. Today Slovakia is known as the European Detroit with a 19 percent flat tax rate on boh personal and corporate income which embodies all of the requirements for the country to become tax heavens. Foreign direct investment presented 18,4 percent of the GDP in 2000. In 2004 the amount of foreign direct investment presented incredible 35,3 percent of the GDP. In 2005 and 2006 the growth of Greenfield foreign direct investment showed positive signs of further investment growth. After the country enacted the flat tax in 2004, it joined the club of those economic miracles in Eastern Europe who showed enough courage to enact the flat tax and thus insured them against possible economic downturn in the future. The phenomenon of eastern European tigers is coined as the flat tax revolution.

The efficiency of government policies increased dramatically under the mandated leadership of Mikulas Dzurinda and Ivan Miklos. In World Competitiveness Ranking of the IMD in 2006, Slovakian government was ranked 17th according to the factor of efficiency. In 2005, tax burden measured as the percentage of the GDP was among the lowest in the OECD group of countries. Tax burden did not reached 30 percent of the GDP. Government spending decreased from 50,5 percent of the GNP in 2002 to 40,5 percent of the GNP in 2004. However, some forecasts have been made and show continually-adjusted signs of decreasing governmental consumption. Between 2000 and 2005, only Ireland, Estonia, Lithuania and Latvia had had higher rates of economic growth. Through the period of liberal economic reforms, the size of the budget deficit reduced from -13 percent to -3 percent. The latest research called Tax Misery & Indexconfirmed the simplicty of the tax system and its pro-growth nature. If you are a taxpayer working in Slovakia who earns 50 000 € gross annually, social security contributions transferred from your income will be equal to 1 736 €, 8 033 € will be taken away through the payment of an income tax. After other minimal obligatory contributions are taken into account, your net income will be equal to 40 231 € or 80,46 percent of the gross income. In Slovenia, your net income would present only 55 percent of the gross income (50 000 €). Social security contributions would be equal to 10 050 €, personal income tax would be equal to 11 323 €, so that only 27 627 € remained left (see: Tax Misery & Reform Index, Forbes).

However, the whole picture of Slovakian economy is far from being an ideal fairytale. Several challenges are still to come ahead. A bulk of incentives in order to energize the economy has been recommended by McKinsey&Company. It recommends the following advice:

"As first, Slovakia should face the problem of corruption and persistent inefficiency of the judicial system. The protection of private property rights should be enhanced immediately. The government should continue improving the infrastructure while it must avoid burdensome regulation of product markets. The liberalization of health-care sector and social security system should continue. Fighting against corruption will improved the efficiency of the judicial branch of government. Slovakia should avoid minimum wages and keep the labor market flexible. The government needs to furtherly privatize the rest of the its stakes in state enterprises whereas the elimination of various forms of ownership restrictions is vastly needed as well. The government should put more efforts to reduce the burden of bureaucracy. Those barriers reduce the dynamics of enterpreneurial prosperity. The government should not hesitate in making efforts to reduce brain-drain outflows. That is the way upon which economic growth will get very much needed boost. After a series of features stated above is to be enacted, Slovakia economy will have more opportunities and engines to be a competitive country with high rates of economic growth and sufficient climate of the entrepreneurial environment."

Source: McKinsey&Company Report on Slovakia (translated by Rok Spruk)

Economic reforms undertaken by Ivan Miklos and other younthful and enthusiastic group of economists made Slovakia one of the friendliest places for portfolio and direct foreign investors. The tax system was redesigned completely and became one of the most competitive ones in the world. In many recent surveys, Slovakia was recognized as the most entrepreneurially innovative country in the region. The level of entrepreneurial innovation is stimulated through low taxes, lower regulation and lower rate of government spending. The government under the leadership of Mikulas Dzurinda was attacked by the trade unions and other rent-seeking interest groups. Those groups penetrated the media and sent waves of illusionary fears against the process of economic change. We especially admire the fact that the bulk of measure to increase economic freedom and let the passage of transition become a success story, was never in question of political popularity of the government. During the period of economic reforms, the rate of political popularity of the government fell below 5 percent. Ivan Miklos told that the imposition of reforms is very costly. Opposition parties are doing propaganda, people are not satisfied, and trade unions fear others while the results of economic reforms come later.

At the following elections, Slovakian voter chose extreme leftists to be in charge of the country. Those parties even formed coalition with the party whose leader is former dictator of Slovakia Vladimir Meciar. With the election of leftists, right-wing extremists and nationalists, Slovakian economic freedom is about to be in danger. However, the people of Slovakia will soon feel the devastating impact of leftist government. It will surely be a colateral damage which puts the long-term competitiveness of Slovakia in a very fragile position.

"It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat."

Thursday, December 07, 2006

Click here and watch the movie which reveals the core of the philosophy of human freedom as well as it shows how the responsibility of the members in a free and competitive society is vitally important to go towards the free society itself.

Tuesday, December 05, 2006

I recently noticed the latest hotspots on the market concerning increasingly important targets of economic education. According to IMD Scoreboard from 2003, pupils from elementary and secondary schools in many different countries failed to reach the edge of basic financial and economic literacy. The country where I come from, namely Slovenia fell below 50th place on the rank of economic and financial literacy.

It is very interesting to see that predominantly genetically anti-capitalistic and genetically socialistic youth is very much eager to protest against any kind of particular economic reforms. Europe is the most obvious place to see such protests. The main source of objection to free-market economy and personal responsibility mainly comes from the environments in which the awareness of economic problems is very weak. In Slovenia and France, students even emerged as an interest group, a compassionate rent-seeker. This significant situation is partly the result of weak and unstable institutions permitting non-market behavior to be undertaken through the special status of treating students as a separate group which “shall not take market rules of the game into account.”

The effect is, of course, disastrous. Because of specially given status, students do not want to undertake productive behavior (work, save and invest) after they finish the study. Instead, they rather focus on how to maintain their current status because if they entered the market, the rules of the game would become very different. Students are also having a serious intention of becoming a strong political power. In this case, the quality of future graduates rapidly falls below the very much needed pace.

On the other hand, students who are not willing to finish the study are manipulating with their insane ideas about “socially just society” That’s the way how rent-seeking students in Slovenia brainwash younger schoolboys and schoolgirls. Instead of focusing how to grab the opportunities and make them come true, they are rather engaged in various forms of protests, being totally unaware of economic problems. In essence, this is a short summary telling how youngsters become anti-capitalistically inspired fanatical fighters in the framework of neosocialist ideology. This inevitably produces a long-run deficit of human capital in the economy. The shift from know-how to political engagement in terms of detecting economic reforms to be enforced is also the primary reason why youngsters become anti-capitalistic. And when they resist the market economy, they become economically as well as financially illiterate. Below you can find two efficient methods to avoid being economically and financially illiterate;

1. FREE TO CHOOSE is from now on available online. You can watch all ten parts of the television series on your personal computer. Both versions are easily available. Parents, this television series is a very useful tool for educating your children about the fundamentals of free market economy.

2. INTELLECTUAL SERIES PORTRAITS; in this audio collection of conversations with distinguished economists Nobel laureates are available to be listened. You can the interview with Ljubo Sirc, Milton Friedman, Friedrich August von Hayek, James Buchanan, Ronald Coase, Lord Harris, Israel Kirzner, Sir Adam Walters and others.

I wish you a joyful listening of conversations and watching of the series.

And remember, there’s no liberty without economic liberty. Without it, even political, personal and civil liberties cannot exist. When Arnold Schwarzenegger came to America, he had no money in his pocket, but he had a freedom to get it. Being free to choose means being free to make your own decisions, free to pursue your own goals and free to turn your potentials into good business.

Friday, December 01, 2006

The U.S. and Germany remain at the top of the business environment competitiveness while China continually slips down and India ascends. In addition to ranking countries by overall competitiveness, the report identifies national competitive strengths and weaknesses, highlights global economic trends, and signals the ingredients of successful economic development. The Index is part of the research contributing to The Global Competitiveness Report 2006-2007, released September 26 by the World Economic Forum.

The U.S. topped at six various level of measuring business competitiveness respectively. It scored high on business environment dynamics, financial markets sophistication as well as on innovative capacity. On the other side, while Germany gained from the quality of legal and partly regulatory framework. It benefited from its orientation on exports and also from the competitive position of German companies in the global markets.

Rounding out top 10, were Finland, Denmark, Switzerland, Netherlands, Denmark, United Kingdom, Hong Kong and SAR. It's been a striking surprise that Hong Kong improved its position by seven. The main area of improvement has been Hong Kong's moving direction in making management education an increasingly important factor of moving towards the rounding up of competitiveness of this small Asian tiger. France, Czech Republic and Cyprus decline partly due to the lack of innovative capacity. France, for example, suffers very much from the rigid labor market, financial markets signalized no notable improvement. China slipped sports to 64th place. This year's lack in this particular area of general and detailed competitiveness was engined by a very high rate of corruption. In release, Transparency International noted China's spreading corruption as on of the foremost concerns. Buyer assessment was weaker and labor rigidies amounted a huge burden as well. China is also known as an environment in which weak private property protection remains one of the biggest obstacles when it comes to improve China's competitiveness position in the global context. The inability of companies to face the upcoming competitive challenges is mainly driven by an inefficient board governance and low management education. Chinese management schools are still more or less politically instilled while according to various reports (Forbes, McKinsey, AT Kearney, Harvard Institute of Strategy for Competitiveness...) the improvement and innovation in management education lacks behind the very much needed pace. In the future, we can expect a decent moderation on China's euphoria in response to its decline in competitiveness index respectively. That's how China's nominal convergence of competitiveness as well as its real position in it, will become more apparent.

On the other side India surprised nearly every economist and research analyist. Somehow, we have diagnosed India's increase in the field of competitiveness score since Indian government has undertaken some serious steps towards the improvement of legal and regulatory framework for companies. Indian companies have become more sophisticated. The conditions on financial markets are still not efficient enough but the increasing level of country's openness and willingness to liberalize the framework for Foreign Direct Investors could, on the long-run, play a pivotial role as one of the greatest measures of country's global position. The recent announcement of Wal Mart to penetrate into Indian retail market, shows that India's comparative advantages (comparably cheap labor and a large market gap for sophistication) dynamically coexist with the improvment in previously stated regulatory and legal framework liberalization. Dozens of other variables increase India's competition itself. There's an ever increasing locally intensive competition, intellectual property is becoming stronger, per capita Internet use and phone calls is growing, and financial market's are slowly getting more sophisticated but this is only a temporary sign of improvement. To make it effective, policy-makers will have to focus on continually announced reduction of state ownership of insurance companies, banks and financial intermediaries. Generally speaking it is admirable that private sector is getting a stronger role within the financial markets. There're also several ingredients to ensure long-term, sustainable economic growth. Institutional stability is very much needed, privatization required, sound macroeconomic policies urgent and the promotion of market openness highly desirable.

However, those measures are still not sufficient enough for a long-term prosperity. The reduction of regulation of business sector is urgent to let firms compete, grow and sustain themselves, FDI measures should be the same as for domestic investors. High tax burden should be put down as income and corporate tax rates were cut. Freedom of the trade should be enforced immediately. Standards and qualifications, confusing bureaucracy and conditional restrictions limit the very much needed imports. Banking reform delays behind the pace required for long-term prosperity of businesses and individuals. Current state-owned bank accounts form more 70 percent of deposits and loans. Private banks represent 17 percent of the entire market activity, while foreign banks accounts, situated in metropolitan areas , account for more than approximately 13 percent of market activities. The explicit protection of governmentally enhenced banks, seen in making limits to foreign enterers, is harmful. The Central Bank is still putting pressure on commercial banks to offer low interest on loans to "priority sectors" such as agriculture and small companies an similar areas. Microeconomic activities account 80 percent of the GDP per capita across countries, while the aim of macroeconomic policy must be committed to officially announced inflation-targeting regime of the central bank, public debt pay-off and budget efficiency balance. There's still many gaps upon which India can easily switch to creating long-term framework for economic prosperity and for the international competitiveness as well. In fact, the latter is the main indicator of country's prosperity.

Macroeconomic factors should improve the quality of business environment while microeconomic activity must be committed to productivity and competitiveness among firms.